Debt-yields range-bound ahead of central bank meet


Posted at Jun 02 2008 02:59 PM | Updated as of Jun 02 2008 10:59 PM



MANILA - Philippine debt yields will likely be trapped in a 5-10 basis point range ahead of a central bank meeting on Thursday as dealers trade cautiously given a split in expectations over what the monetary authority will do.

The consumer price index for May will be released around seven hours before the central bankers review policy.

Traders said that if annual rise in the CPI exceeds the top end of the central bank's forecast at 9.6 percent, which would also be a nine-year high, investors will price in a quarter percentage point rate rise.

"We will probably be trapped in a 5-10 basis point range for the week, but if inflation breaks the 9.6 percent high, we will see rates pull back by 25 basis points," a dealer from a local bank said on Monday.

Traders said some investors had already factored in a 25 basis-point hike in overnight rates as inflation has picked up since the start of the year. Like other countries globally, the Philippines is feeling the brunt of rising food and fuel costs.

"What is scary about inflation is potentially it could go higher and higher," said another trader from a local bank.

The central bank has forecast that annual inflation in May could be in a range of 8.8-9.6 percent, against 8.3 percent in April, which was its highest level in nearly three years.

The Philippines has set an inflation target of 3-5 percent this year, but the monetary authority has already said that goal was "clouded with risks."

Central bank Governor Amando Tetangco signalled last week he was more focused on protecting the inflation target of 2.5-4.5 percent for 2009.

The central bank kept interest rates unchanged at 5 percent for overnight borrowing and 7 percent for lending at its April policy meeting. It last raised rates by 25 basis points in October 2005.

The government plans to sell P7 billion ($161 million) of the 2013 paper at 0500 GMT on Tuesday. It was originally sold as a seven-year bond in 2006 and currently has a remaining life of four years and nine months.

Five-year government paper was quoted at 8.8219 percent in the secondary market on Monday, higher than the 6.568 percent average rate at the last successful auction on March 11.